Whether or not financial planners should formalise their referral agreements with other professionals like life agents, accountants, lawyers and paraplanners, may well depend on the closeness of the relationship.
But even when there is a high level of trust and understanding on both sides, Peter Townsend, from Peter Townsend Business Lawyers, suggests it’s not a bad idea to have a formal written agreement between the parties.
“People worry that asking for a written agreement indicates a lack of trust. But if there is a lack of trust, paperwork won’t help you,” he says.
Townsend says that by making agreements formal, both parties have the opportunity to spell out exactly what they expect from the relationship.
This can include things like whether or not the relationship is going to be exclusive — for example, if you have a relationship with an accountant, is the accountant going to refer clients to other financial planners apart from you and vice versa?
And the very process of formalising the arrangement means decisions can be made at the outset about how close the relationship is going to be.
“The parties can make decisions on things like whether or not they are going to conduct joint marketing and joint seminars, and whether they are expected to keep each other’s brochures in their foyers,” Townsend says.
Other things that can be spelled out in the agreement are whether or not each party is expected to devote expenditure to developing the relationship.
Another advantage in documenting the relationship is that it becomes a point of reference for the future — the agreement is a document that can be revisited if questions arise over what is expected from each party.
“It’s about clarity,” Townsend says.
“If there is a formal document, it’s very clear what each party expects from the relationship and there can be no argument about it later.”
Townsend says a formal agreement should cover sensitive issues like client ownership.
“It should specify whether or not it is intended that the financial planner would ‘own’ clients referred from a professional partner, from a financial planning perspective,” he says.
It is equally important that each party specifies what they get out of the relationship in terms of remuneration.
“Decisions need to be made about whether or not commissions are going to be shared and if so, how they are going to be shared. Decisions also need to be made about what to do with fees.”
Townsend warns that some professionals may not, in fact, be allowed to share remuneration.
“Some states restrict lawyers from getting payment for referrals and lawyers can’t pay financial planners a share of their fees,” he says.
The Financial Services Reform Act (FSRA) also has the potential to make the referral relationship more complex.
Townsend says theAustralian Securities and Investments Commission(ASIC) has always been concerned that systematic referrals could be used as a way of skirting around the licensing requirements “where an adviser who has lost his licence or authority could refer clients onto another adviser and take a sizeable cut of the commissions”.
But he says ASIC is not as concerned about relationships where the volume of referrals is not copious and the referrer takes no part in the process of advising.
The issue was obviously important enough for the Government to take the rules out of the ASIC Policy Statement (the now defunct Policy Statement 120) and set them out in the Corporations Regulations at Reg 7.6.01(1)(e) and (ea).
“Advisers must understand how these regulations impact on the person doing the referring and make sure that person meets their disclosure obligations,” Townsend says.
Ultimately, Townsend sees huge potential for all concerned, if they make the right referral relationships.
